It’s common knowledge that factors such as who you know, and who your friends know, can make all the difference when it comes to building success. What may be less obvious is how this network can include both allies and competitors, and the impact of these complicated connections.
The same logic applies to entrepreneurs and venture capital firms. These days, VC firms are increasingly investing in competitors of firms they previously backed. The outcomes of such co-investing is the subject of the latest research from Dan Wang, the Lambert Family Associate Professor of Business at CBS. While many people see startups and VCs as playing two separate roles in the business world—startups build products and solve problems while VCs exist to fund their efforts — Wang sees the two as wholly intertwined.
In a video interview, Wang contrasted two of his studies: “The past is prologue? Venture-capital syndicates’ collaborative experience and start-up exits” (Academy of Management Journal, 2022), and “Exposed: Venture capital, competitor ties, and entrepreneurial innovation” (Academy of Management, 2015). These papers reveal how prior collaboration between organizations, also known as their relational embeddedness, can both help and hinder innovation and entrepreneurial success among venture capital firms and startups.
Wang highlighted three key takeaways from his ongoing research, and what it might mean for the future of entrepreneurship and early-stage VC funding.
1. A VC that funds a competitor means bad news for your startup
Pay close attention to which other firms a VC chooses to fund. If a VC first funds Firm A and then chooses to work with a competitor, Firm B, it could severely impact the innovation coming out of Firm A or, worse, completely ruin its founders’ chances of a successful exit.
“We find that when that happens, you as a startup founder tend to be less productive in introducing new product introductions, less productive in applying for patents as well,” says Wang, whose research focuses on how inter-organizational collaboration, such as partnerships between two VCs can—and can’t—help founders and VC firms reach mutually beneficial success.
Wang says this is because a VC funding a competitor can unintentionally leak valuable information and intellectual property from you to your competitor, threatening future success. Especially among lower-reputation VC firms, Wang says an organization’s connectedness is not always a net positive.
2. A VC’s collaborators can predict your firm’s exit strategy
Startups that are backed by venture capital funding can typically expect one of two exits: an acquisition by a larger organization, or a public market exit, also known as an Initial Public Offering (IPO).
If your startup is backed by a group of VCs—commonly known as a syndicate—whether or not those VCs have collaborated in the past can greatly impact your exit path, or if your startup succeeds at all. If the VCs that make up the syndicate have co-invested previously, your chances increase of achieving a smaller exit in the form of acquisition, but your chances of succeeding overall are higher, according to Wang. Acquisition exits — when a startup is acquired by a larger organization — are typically less lucrative for founders when compared to an IPO, or initial public offering.
On the other hand, if the syndicate members that back your startup have not collaborated previously, you’ll be much more likely to achieve an IPO, but also more likely to fail.
“It's harder to coordinate among a group of VCs that have never worked together in the past,” Wang says. In the paper, “The past is prologue? Venture-capital syndicates’ collaborative experience and start-up exits,” he and his co-researchers analyzed data from nearly 11,000 U.S. startups that received first-round funding from multiple VCs between 1982 and 2011.
3. VC-startup relationships are a two-way street in the digital age
Wang theorizes that as businesses grow throughout the digital age, the impact of business relationships will only grow stronger. Trust-building between venture capitalists and startup founders is critical to building these strong relationships.
“When platforms make it possible for us to expand our networks, the closest ties that we have tend to be even more important to us because there's so much choice available,” Wang explains. “So your most trusted advisors—if you're a startup and they happen to be venture capital firms—become even more important.”
Similarly for VC firms, the most promising startups become even more promising and valuable in the digital age. But, as firms build their relationships and expand their networks, gaining valuable information and insight, it’s critical to remember that these vast networks can also act as a double-edged sword.
“Our networks can also be sources of information outflow away from us as well. And so it's that tension that I often think about when developing and advising folks on networking strategies,” Wang says.